What is overhead?

Overhead is those costs required to run a business, but which cannot be directly attributed to any specific business activity, product, or service.

Thus, overhead costs do not directly lead to the generation of profits. Overhead is still necessary, since it provides critical support for the generation of profit-making activities. For example, a high-end clothier must pay a substantial amount for rent (a type of overhead) in order to be located in an adequate facility for the sale of clothes. The clothier must pay overhead to create the proper sale environment for its customers.

Examples of overhead are:

• Accounting and legal expenses
• Administrative salaries
• Depreciation
• Insurance
• Rent
• Taxes
• Utilities

The other type of expense is direct costs, which are those costs required to create products and services, such as direct materials and direct labor. Overhead and direct costs, when combined, equal all of the expenses incurred by a company.

Similar Terms

Overhead is also known as burden or indirect costs. A subset of overhead is manufacturing overhead, which is all overhead costs incurred in the manufacturing process. Another subset of overhead is administrative overhead, which is all overhead costs incurred in the general and administrative side of a business.

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